As I’m driving along the highways of Northern Virginia the radio blares out an ad about a buyer who found a home for pennies on the dollar. They are estatic about the half price home they are now living in. But what does that really mean?
The property originally sold for $500,000 in a terrific Northern Virginia neighborhood. Today after languishing 9 months on the market as a short sale (or sitting empty) the home goes to foreclosure. The values in the neighborhood have declined and now the average sales price is now $250,000. While the home sat empty or perhaps as the previous owners left they stripped out the appliances, made a mess out of the carpets and left holes in the walls.
As a buyer you think this is great I’m buying a home for 50% off the original price. But wait the home isn’t worth $500,000 (previous sales price) now it is only worth $250,000 (current market value), it isn’t 50% off. It is at 100% of today’s market value. This is before you make any of the necessary repairs to make it habitable.
Did you get a home for pennies on the dollar? No you got a home at current market value. Will the home be worth $500,000 in a month after you make the repairs? Highly doubtful, if Northern Virginia returns to normal appreciation of 3-5% annual then the home probably won’t be worth $500,000 for many years to come.
Yes there are some investors with cash who have picked up a home at auction or through foreclosure that are far below market value. These homes are turned over to contractors who put them back in shape and are flipped for a profit. But those are not the buyers these ads are targeting. They are after YOU the everyday buyer who is looking for a deal.
So don’t be lfooled into thinking that you can buy a home today for pennies on the dollar.